NCPA - National Center for Policy Analysis

TAX INCENTIVES FOR CHARITABLE GIVING A BOON TO NONPROFITS

August 31, 2004

A handful of states now allow individual tax credits for charitable contributions. A study by the Urban Institute on Arizona's tax credit program indicates that the nonprofits qualified for such programs are benefiting, although researchers express concerns about the competition among nonprofits for donor dollars.

Tax credits, which differ from the traditional charitable tax deductions already in place, are applied after taxable income is calculated and reduces the dollar amount of taxes owed.

In Arizona's program, nonprofits that wish to participate must "self-certify" to the state by sending a letter stating they meet the eligibility criteria, which requires an organization to dedicate at least 50 percent of its donations to welfare or sub-poverty level residents.

According to the Urban Institute:

  • Self-certified groups had revenues and expenses that were about 60 percent greater than noncertified groups.
  • Self-certified groups were shown to be financially healthier than noncertified organizations, with 71 percent of them showing positive net incomes in 2000 (compared to 63 percent of noncertified groups).
  • Self-certified groups spent more of their 2000 budgets on fundraising (4 percent) than noncertified groups (2 percent).

In other words, self-certified groups place a higher priority on attracting potential donors than noncertified groups, likely due to the government support given to self-certified groups through donor tax credits.

However, some observers are concerned about the effect the state's program may have on smaller nonprofits and ones that may not qualify under Arizona's programs, such as environmental groups and animal rights groups. Moreover, researchers aren't sure the support of large, self-certified organizations translates into more help for the poor, or simply transfers contributions from one non-profit to another.

Source: Carol J. De Vita and Eric C. Twombly, "Charitable Tax Credits: Boon or Bust for Nonprofits?" Urban Institute, July 1, 2004.

For study text http://www.urban.org/UploadedPDF/311036_charting_no16.pdf

 

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